Dollar-Gold Decoupling

By

John Hughes and Scott Maragioglio

| Dec 21, 2012 | 1:45 PM EST

Gold prices have decoupled from the normal relationship with the dollar index recently and swung from a negative towards a positive correlation. This is unusual, but we expect to see the normal inverse correlation reassert itself. The dollar index is dominant in the dollar-gold relationship and we're looking for further weakness from the dollar, which should drive gold prices higher. The disconnect between the dollar and gold could be an opportunity for gold bulls to get long. It seems that there is a bearish dynamic related to the end of the year and potential long-term profit taking by gold bulls in front of the expected changes in capital gain tax rates next year.

We've recently seen the 34-day correlation between gold and the dollar cross the zero line and move into positive territory with some conviction. The current correlation is +0.70 (+1.0 is perfect positive correlation), which is unusual behavior and we don't see this level of positive correlation persisting for long. We expect a mean reversion in the correlation back to historical norms. The dollar index has broken the uptrend channel and started to roll over. There is increasing vulnerability in the dollar index as the bears gain traction. The Fed lacks an exit strategy on its quantitative easing policy and we simply expect more money printing from the Fed....189 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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